Taxation Law - Taxation Disputes - Default Assessments

Taxation disputes can arise for many reasons. Often they occur where no return has been furnished or the Commissioner is not satisfied with the return furnished or has reason to believe the person who has not furnished the return has derived taxable income. In these circumstances he is entitled to make an assessment under section 167 of the amount on which, in his judgement income tax has to be paid for the purposes of section 166 of the Act. Often non-complying taxpayers believe that where there are no records available to the Tax Office the amount of their tax liability cannot be determined therefore this effectively defeats the Tax Office in raising the appropriate assessments. Obviously this was the situation which section 167 of the ITAA 1936 was designed to address. Under this section the Commissioner has power to make default assessments of taxable income in respect of the taxpayer’s attributable income whether onshore or offshore. Those substantiation requirements and the ability of the Commissioner to raise the default assessments under section 167 of the Act are extremely powerful weapons which are utilised in various circumstances and often give rise to challenges by taxpayers. This may be done by way of objection, review and appeal procedures under the TAA 1953 which allows for the review of the assessment by the Administrative Appeals Tribunal or Federal Court on the grounds that it is excessive or perhaps is engendered by bad faith. 

Of course, where the Commissioner exercises his power to make default assessments he cannot be capricious. He has to view conclusions of fact and make subordinate calculations to facilitate final assessment of taxable income. Certain facts have to be known to exist before assessment can proceed under the Act. He may be entitled to adopt particular interpretations of the relevant facts which trigger the default assessment provisions. Where this material indicates that the taxpayer falls within the attribution provisions then section 167 may be used to adopt a view of the relevant facts which will lead to the calculation of attributable income and therefore the issuing of default assessments. Of course in all these circumstances the approach taken by the Commissioner must be reasonable and must depend upon an application of the facts to the law which will allow default assessments to issue.  Taxation disputes arise where this is not the case and tax officers do not have sufficient information to support the making of default assessment for each relevant income year.

As we all know international tax evasion is a high priority on the radar screen. All types of entities, arrangements and payments are looked at. As for entities the focus has fallen on controlled foreign companies (CFCs), foreign investment funds (FIFs) and transferor trusts (TFs). Essentially there are a number of anti-avoidance provisions preventing Australian taxpayers from accumulating their overseas-sourced income in these non-resident entities and trusts by attributing certain of the income to various classes of participants. Different rules apply to each of these entities or trusts but in the case of controlled foreign companies they normally centre around control, associates, client interest in the CFC, percentage interest, the attribution interest, the attribution percentage, the attribution income, the active income test and the amount of the attributable taxable income. 

This is a complex area made worse by the introduction of CFCs, FIFs and TFs in tax havens. In these circumstances documents are concealed or hidden either directly or indirectly by the taxpayer or their intermediaries by arrangements designed to conceal the identities of the true participants in the scheme or arrangement so that monies earned or assets dealt with cannot be traced. These arrangements rely upon their being hidden or concealed to ensure their efficacy but once they are discovered then tax evasion becomes obvious. Normally those involved try to deny the true nature of the relationship and when called upon to explain their involvement or otherwise are unable to do so or where documents exist they are insufficient to properly explain the true legal effect of their involvement. Irrespective where there is insufficient material available the Tax Office will attempt to obtain all relevant material from the taxpayer and/or any relevant third party to underscore the decision making process.  

In summary the Commissioner has an array of weapons at his disposal to obtain information to assist the exercise of his discretion to raise a default assessment(s) against an attributable taxpayer(s) where there is either insufficient information provided by the taxpayer or failure to lodge a return in circumstances which suggest that the taxpayer has not fully accounted for all of his taxable income whether onshore or offshore. Where taxpayers are contacted by the ATO about their taxation affairs they need to obtain proper advice and representation to allow them to explain their position and where necessary to mitigate the consequences of their conduct where tax non-compliant.

For competent, professional advice and assistance contact Frank Egan of LAC Lawyers on (02) 9904 6800.